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Live Long & Prosper
Elizabeth Harris
12/01/2006
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When a Philanthropist in her 60s met with her financial advisor, she asked him
to calculate how much money she could give away. The woman had given millions to
her favorite causes and shared generously with her children, and she assumed she
had much more to bestow. But she was shocked to learn that if she continued to distribute $3 million to $4 million each year, she would deplete her capital by
the time she reached her early 80s.
 "It scared her," recalls Lew Altfest, the woman’s
financial advisor and president of L.J. Altfest & Co. in New York. He placed
her on a "giving diet," recommending that she scale back her outlays by $1
million per year. "She had longevity in her family—her grandmother lived into
her 90s and her mother was in her 80s."
Like Altfest’s client, many individuals in industrialized
nations are living longer—and this is reshaping the world of estate planning. In
the United States, the length of the average life span nearly doubled in the
past century; males born in 2005 are expected to live to an average age of 75
and females to 80, according to Census Bureau projections. Many people will live
far longer. If they reach age 65, women enjoy a 44 percent chance of living
until 90, while men have a 34 percent chance, according to the Society of
Actuaries Annuity 2000 mortality table. The odds for an average couple increase
even more. A 65-year-old couple has a 63 percent chance that one of them will
live beyond 90. Demographers believe life spans will lengthen even more.
Longevity is expected to increase worldwide; some developed nations will see
average life spans reach nearly 100 by 2050, according to James Vaupel, a
demographer with the Max Planck Institute for Demographic Research in Rostock,
Germany.
The trend has enormous financial and lifestyle implications. The well-constructed retirement, wealth management and estate planning
strategies of today can be toppled if a principal lives for 10, even five, years
longer than expected. Some individuals, such as the aforementioned
philanthropist, will be forced to scale back their giving. Others will have to
delay their retirement plans in order to maintain annual expenditure goals.
Longer life spans also force families to confront thorny questions regarding how
to maintain a senior’s independence and how to balance preparations for the
often-extraordinary costs of health care with the desire to leave a substantial
inheritance.
Complicating these equations is the fact that affluence
correlates with longer average life spans. Access to better medical care and
healthier lifestyles help extend life, says Andrew Oswald, an economics
professor at the University of Warwick in Coventry, England. Oswald calculates
that someone living on an annual income of about $130,000 will live an average
of five years longer than someone with an income of $45,000. However, many
individuals fail to understand how these demographic differences will affect
them personally.
TOP VIEW
Advances in medicine and healthier lifestyles have increased life expectancies significantly; actuaries say many people born today could approach
the century mark. This is forcing a revolution in estate planning as individuals
reconsider whether their fortunes will sustain their chosen lifestyles for more
years than anticipated. As wealth managers scramble to recast their clients’
estate plans for the long haul, a new class of professional gerontology advisors
is emerging to assist. |
"Most of us underestimate our longevity," says Maureen Mohyde,
a registered financial gerontologist with The Hartford’s corporate gerontology
group. At least 60 percent of Americans surveyed by the Society of Actuaries
last summer misunderstood average life spans and lowballed their own life
expectancy. These miscalculations carry heavy financial repercussions. Ron Rogé,
a financial advisor with RW Rogé & Co. in Bohemia, N.Y., says adding just
five years to a principal’s life expectancy requires significantly more
assets—he estimates 20 percent more than an existing portfolio—to maintain the
same retirement income. For example, if a person initially requires $5 million
to fully fund his retirement, extending his life by five years would require an
additional $1 million in assets.
"We look for low-probability events that can have catastrophic
consequences—running out of money is one of them," says Rogé, who recently began
increasing his estimates of his clients’ life expectancy from 95 to 100. He also
has reduced the maximum annual withdrawal target of his clients to 3 percent,
from the more standard 4 to 5 percent. "People are becoming realistic about it,"
he says.
Not-So-Great Expectations
Those middle-aged individuals who plan to retire in their 50s
or even early 60s are discovering they must scale back their prospects. Most of
them do not plan for their nest eggs to sustain them for 40 to 50 years, but
demographic trends show that such foresight may become a necessity for a large
percentage of the population. If longevity trends continue upward, the potential
for underestimating retirement portfolios become even more worrisome. The
initial strategy for managing such contingencies is to implement conservative
spending plans. Business people accustomed to high-six-figure, or even
low-seven-figure salaries, often harbor unrealistic ideas regarding their
retirement income: drawing $400,000 each year from a $10 million portfolio, for
example, or allotting $250,000 a year for private jet travel might well be
impossible, according to Michael Book, a managing partner with Lenox Advisors in
New York. "They think they’re so wealthy they can’t screw up, and they can," he
says.
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